USD Into FOMC: Mind A Hawkish Surprise - Credit Agricole

Investors will focus on the FOMC statement looking for indications that the policy rates will be going up before long, potentially as soon as June. We expect that the Fed will signal diminishing concerns about the impact of the global economic and financial conditions and thus take a step closer to the more balanced outlook for domestic growth and inflation that underpinned the December rate hike.

In addition, the April statement could also take on board the continuing rebound in commodity prices, which should push the domestic inflation closer to the Fed’s 2% target. Last but not least, consistent with recent Fed comments that the latest bout of disappointing US data is only a temporary ‘soft patch’, the policy statement could reiterate that the economy continued to grow modestly. The April statement could encourage investors to front load Fed rate hike expectations once again. Depending on the change in the statement’s language the correction could be considerable.

All that should help the USD recover more broadly. Needless to say, if the Fed keeps its statements little changed from March and thus signals little appetite for a rate hike in June, the markets could revert to their dovish outlook and punish USD. That said, given the extent to which the rates expectations have been pushed back since the start of the year, we doubt that the rates market response will be significant. We further note that the USD continues to look cheap relative to the relative rate spreads with the rest of G10. We therefore think that the bigger move on the day will come of the back of potential hawkish surprise by the Fed.